By:       Christopher Brady, TRG Associates
            Anne Terwilliger, TRG Associates
            
Credit card processing fees have traditionally been seen as a cost of doing business, with the benefits outweighing the associated costs.  The benefits of receiving Recurring Monthly Revenue (RMR) payments by credit card includes timely payment by the customer, increased cash availability, reduced collection costs, and reduced attrition due to non-payment.   Many Electronic Funds Transfer (EFT) merchant payment processors also offer the ability to automatically update credit card expiration dates, effectively preventing failed transactions which often resulted from those change in dates.  Offering a credit card payment type was also seen as a competitive advantage over companies who did not offer this benefit.  This was all true while inflation was kept at bay.  

Over time, credit card companies have been steadily increasing the processing fees in which they charge to the EFT merchant payment processor.  Some merchant service processors no longer offer American Express because their fees skyrocketed.  The EFT processors, in turn, are passing those fees on to the alarm companies who use their service. 

That now begs the question “If the alarm companies are absorbing those credit card processing fees, does it make sense for them to bake those charges into the customer’s RMR, or should they instead encourage them to move to ACH processing where costs are not passed again to the individual subscribers?”  At TRG Associates, we were recently asked this question, and the simple answer was: “Maybe.”   

Some alarm companies have already begun passing on credit fees to their customers, but this could send the wrong message.   It could be seen as punitive and only intended for the company to recoup its own costs without any concern for the inconvenience placed on the customer.   It could increase attrition by incentivizing the customer shop around for another company who do not impose these fees.  It could also condition the customer to revert to paying by check.

Does adding a credit card processing fee really amount to an increase in RMR?  Most contracts have clauses stating that an increase will not be imposed until the first year of the contract has elapsed.  Some contracts also have a cap on the rate increase amount of the RMR.   If an annual increase meets the contract’s top cap amount, does adding a credit card processing fee on top of that now violate the terms of the contract?  Most monitoring contracts do not provide language to address this.   

Passing along credit cards fees to the subscriber is also impacted by consumer protection laws.  In some states such as Connecticut, Massachusetts, Oklahoma and Maine, it is illegal to do so.  Other states, like Colorado, has a cap on the fees which can be passed on.  As of July 2024, California businesses must comply with a new “hidden fee” statute which stipulates that the amount charged to the consumer for services (for the customer’s personal use) must include all fees for the service in the advertised price.  

How are state, county, and city sales taxes affected by passing on credit card processing fees?  Does your state consider this amount to be taxable?

While passing along a credit card processing fee may seem like simple accounting for each RMR cycle, the cost of doing so may defeat the purpose.  For example, if the amount of an RMR contract is $40 and the credit card processing fee is 3%, that processing fee would be calculated at $1.20.  If I raised the customer’s contract amount to $41.20 to absorb that processing fee, the credit card company will actually charge me 3% of $41.20.  While that additional $.05 may not seem like much, consider for how many RMR cycles that processing fee applies (12 for monthly, 6 for semi-annual, 4 for quarterly, and 1 for annual).  The cost for that one customer can add up, multiplied by the other customers who were similarly increased.  Does your accounting system provide for the automatic calculation of credit card fees based on the RMR amount?  Many do not.

Some alarm companies have offered reduced RMR rates as an incentive to transition their customers from credit card to ACH payments. This is as a mutually beneficial solution to expediate payments at no additional cost to the customer.   

Before passing along any credit card fees, check with your legal representative and update your monitoring contract accordingly.   Consider incentives to your customers to change payment types and craft a letter alerting customers to your decision on imposing fees.  

If your company would like assistance in reviewing the pros and cons of passing along credit card fees, please contact TRG Associates at (860) 395-0548.

Since 1991, TRG Associates has assisted security alarm, PERS, and fire companies with the implementation of cost-effective business solutions including: Due Diligence, Acquisition Planning, Business Valuation, and Expert Witness. In conjunction with TMA, TRG provides an industry-wide Attrition Study that can be found at TRGAssociates.com/attritions.

Christopher Brady began his role at TRG Associates, Inc. in 2010. As Vice President, he performs due diligence, management consulting, and financial services. He has assisted a wide range of companies, entrepreneurs, lenders, and investors in evaluating and assimilating acquisitions and with the placement of debt/equity within the Security Industry. He also provides Interim CFO and Board Member duties for Life Safety businesses as they restructure.

Anne Terwilliger joined TRG Associates in 2022 as a Senior Associate.  In this role, she provides the security industry with research and analysis as well as performing due diligence and valuation services to support acquisitions. Prior to coming to TRG Associates, she provided SedonaOffice training and support at Bold Group to the largest alarm companies in the US.  

Source: snnonline.com